India's Macroeconomic Outlook Is Subdued And Uncertain Says IMF

The International Monetary Fund (IMF) noted in a latest update that India's macroeconomic outlook is more subdued and uncertain than in recent years. Growth is projected at 6.1 percent in FY2019/20. Investment and private consumption are expected to firm in the second half of the fiscal year. This is expected to be supported by the lagged effects of monetary policy easing, recent measures to facilitate monetary policy transmission and address corporate and environmental regulatory uncertainty, and government programs to support rural consumption being rolled out. IMF recommends a more ambitious medium-term consolidation path. This need is made more urgent by the recent lowering of CIT rates which, in the absence of offsetting measures, would contribute to pushing general government debt to a 10-year high of 69 percent of GDP by end-March 2020.

Over the medium term, growth is projected to gradually rise to its medium-term potential of 7.3 percent on continued commitment to inflation targeting, gradual macro-financial and structural reforms, including implementation of reforms initiated earlier, such as the Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC), as well as ongoing steps to liberalize FDI flows and further improve the ease of doing business. India has been among the fastest-growing economies in the world over the past few years, lifting millions out of poverty. However, growth slowed to 5.0 percent in the April-June 2019 quarter (y/y), a six-year low. The deceleration of consumption and investment was exacerbated by weaknesses in the non-bank financial sector and corporate and environmental regulatory uncertainty. Weak demand in conjunction with continued low food pricesthanks to successive normal monsoon rainfall and agricultural sector reformscaused average inflation to moderate to a multi-year low of 3.4 percent in FY2018/19.

After rising through late 2018, external vulnerabilities eased in the first three quarters of 2019, on lower oil prices and renewed portfolio inflows. In FY2018/19, the current account deficit (CAD) widened to 2.1 percent of GDP, on a rising oil import bill. Foreign direct investment (FDI) financed about half of the CAD. The rupee depreciated by about 3.4 and 5.9 percent on average in real and nominal effective terms in FY2018/19, also reflecting portfolio outflows in mid-2018. The U.S. dollar value of non-oil merchandise exports expanded by 6.6 percent, broadly maintaining India's global export market share. Gross reserves declined by US$12 billion during FY2018/19 to US$413 billion (7 months of imports), while the net forward position fell by US$34 billion. Gross reserves rose to US$429 billion by end-August 2019 on renewed portfolio inflows and they remain adequate. India's external debt remains low at 19 percent of GDP.

Macro-financial risks from banking sector weaknesses have decreased somewhat, and steps have been taken to enhance monitoring of NBFCs and alleviate liquidity pressures faced by some NBFCs. Capital injections from the government budget and the initial results of the implementation of the Insolvency and Bankruptcy Code (IBC) have improved public sector banks (PSBs) capital position and asset quality.